Policy recommendations to boost infrastructure investment within available financial resources
1. Develop a pan-European infrastructure strategy to encourage ‘good’ infrastructure investment, address constraints and remove bottlenecks.
- Identify short-term and long-term priorities in a forward-looking approach. Countries should define priority projects, which focus on areas with a sustained impact on economic growth and the potential to enhance productivity.
- Improve the regulatory framework and provide better financial ‘instruments’ – assets, sources and vehicles – to encourage greater investment and make better use of the existing financial resources.
- Encourage the right choice of projects. In order to avoid inefficiencies and waste of financial resources, and to create a comprehensive pipeline at the EU level, a better mechanism for project selection needs to be designed on the model of the UK’s National Infrastructure Plan.
- Projects submitted by member states to the European Commission should be selected through a bottom-up approach and on the basis of criteria such as transnational dimension, size, sectors with high technological intensity and: priority should be given to sectors with high technological intensity, and economic return.
2. Create a European Infrastructure Agency to be responsible for the coordination and implementation of the pan-European infrastructure strategy. This agency should work in collaboration with the G20, the World Bank and the regional development banks as well as with the European Commission, the EIB and the EU member states to exchange information and best practice, set up a pan-European database of projects and assist investors to seek projects relevant to them and to compare them across different countries.3. Foster effective collaboration between the public and the private sector. If Europe has the ambition to lead again on innovation and competitiveness, then a good ‘mix’ between public and private participation needs to be devised. For example:
- the public sector should play a key role at a project’s initial stage: it should set priorities, provide a transparent procurement procedure, offer initial financial support, provide guarantees and smooth risks;
- public-private partnerships (PPPs) should be encouraged. A European PPP Expertise Centre should be created as a joint initiative by the European Investment Bank (EIB) and the European Commission to share experience and expertise, analysis and best practice relating to all aspects of PPPs. Procurement procedures should do better at specifying the costs and risks of projects in order to avoid delays and extra costs. There should also be more transparency on the returns made by equity investors;
- additional upfront guarantees from the public sector should provide support throughout their life-cycle for large projects with higher risks but high public benefits. When a project runs into difficulties, the public sector should step in and take ownership of the asset.
- reviewing the rating criteria for investors, which currently favour financial assets with short-term maturities. For instance, speculative-grade short duration loans (rated ‘BB+’ and below) currently require less capital allocated by insurers than a four-year ‘BBB+’ or eight-year ‘A+’ project investment;
- facilitating access to long-term investment funds. The European Commission roadmap of March 2014 suggests new ways to unlock long-term financing to meet the needs of the European economy;
- fostering coordinated action by national governments. The political groups in the recently elected European Parliament should make this issue a priority on their agendas, communicating this also to MEPs’ national capitals.
5. Improve the allocation of Structural and Cohesion Funds in order to tackle inefficiencies, leverage up the resources available and create incentives to choose the right projects by:
- providing EU funds only to projects included in the European pipeline in order to improve resource allocation;
- ensuring support, advice and due diligence so as to reduce inefficiencies;
- reducing the proportion of co-financing by making more European resources available. The European Commission could use Structural and Cohesion Funds to fund a small portion of the total costs, with the bulk of the financing covered by loans from the EIB and national development banks. These institutions could pool their available resources by issuing euro-denominated securities for investment in infrastructure projects;
- reducing political interference at the regional/local level in the definition and management of infrastructure policies through a due diligence process undertaken by the EIB, so as to assure investors about the strength and stability of the country-specific regulatory frameworks.
6. Promote the use of project bonds to fill financing gaps in the riskier stages of infrastructure projects undertaken by the private sector and included in the European pipeline. Resources available for the EU 2020 Project Bond Initiative, carried out by the EIB and currently in its pilot phase, should be increased. The Project Bond Initiative should be strengthened through:
- broadening the pipeline of suitable projects and focusing on bridging the gap between debt and equity capital to help projects develop through their riskier stages. Resources could be pooled with national development banks, such as Cassa Depositi e Prestiti, Caisse des Dépôts et Consignations, Kreditanstalt für Wiederaufbau, Instituto de Credito Oficial, PKO Bank Polski;
- issuing European-backed bonds (or ‘eurobonds’) with long maturities for infrastructure projects. Since issuing Eurobonds fully backed by all EU member states is still a sensitive political issue, bonds could be jointly issued by national development banks together with the EIB. These hybrid bonds would be transnational and jointly guaranteed by participating national governments, making them more attractive to investors.
8. Promote higher infrastructure investment in countries with wider fiscal space. Germany, for instance, requires investment to upgrade and modernize its infrastructure and has the necessary fiscal capacity to undertake more ambitious investment programmes.